Tobacco Giant Reynolds American Unlikely to Get a Sweeter Offer

By Kevin Allison

Oct. 21, 2016

John Boehner, the former speaker of the House of Representatives, may find that his month-old gig as a board member at Reynolds American does not last as long as he expected. British American Tobacco is offering $47 billion for the 58 percent of the Camel cigarette maker that it does not already own.

At an enterprise value of 16 times the last 12 months’ earnings before interest, taxes, depreciation and amortization, or Ebitda, that is a decent price. Mr. Boehner and his colleagues may struggle to smoke out a noticeably better deal.

Reynolds American, the second-biggest American tobacco group after Altria, said on Friday that it would consider the cash-and-share offer from its overseas peer, which already owns 42 percent of the company.

British American Tobacco’s offer is worth $56.50 a share based on Thursday’s closing prices. That is around a 20 percent premium to where Reynolds’ stock traded before the bid was announced. That is no knockout, but because the two companies have long been considered likely merger partners, some kind of takeover premium may have already been baked into the target’s worth.

Viewed through a value lens, British American Tobacco looks more generous. Reynolds paid only about 13 times Ebitda for a smaller rival, Lorillard, in a deal that closed last year. British American Tobacco is offering a higher multiple, and handing the majority independent shareholders of Reynolds a premium worth more than double the roughly $3 billion upfront value of the anticipated $400 million a year in savings — calculated after tax and on a conservative multiple of 10.

That is not the only reason for Reynolds’s independent directors to take British American Tobacco’s opening salvo seriously. The British group’s 42 percent stake means Reynolds can’t count on a credible rival bid emerging. Third-quarter earnings earlier this week were not as good as Wall Street expected. The company also announced a transition at the top, with Debra Crew set to take over from Susan Cameron as chief executive in January. That could further filter Reynolds’s appetite for playing hardball.

Longer term, higher American interest rates could take some of the air out of tobacco companies’ rich valuations as their allure as dividend stocks wanes. Mr. Boehner was known in Congress for a propensity to burst into tears, but even if Reynolds cannot squeeze much more out of British American Tobacco, it would not be something to cry over.